FEDERAL COURT OF AUSTRALIA

Arndell Formwork Pty Limited (in liquidation) ACN 126 558 665 v Baseline Constructions Pty Limited ABN 96 058 578 662 [2010] FCA 554

THE COURT ORDERS THAT:

1.         Pursuant to s 471B of the Corporations Act 2001 (Cth) the respondent has leave to proceed with its cross-claim filed on 10 March 2010.

2.         The costs of the notice of motion filed on 8 April 2010 be costs in the cause.

3.         The notice of motion filed on 8 April 2010 be otherwise dismissed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                          By notice of motion filed on 8 April 2010, the respondent in this proceeding, Baseline Constructions Pty Limited, seeks leave pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed on its cross-claim filed on 10 March 2010.  It also seeks security for its costs of the proceedings.  On 31 May 2010, I made orders granting Baseline leave to proceed with the cross-claim, dismissing the application for security for costs and ordering that costs of the notice of motion be costs in the cause.  These are my reasons for those orders.

Leave to proceed with cross-claim

2                          The applicant, Arndell Formwork Pty Limited (in liquidation) submitted that it neither opposes nor consents to Baseline’s application for leave. The discretion to grant leave under s 471B is unconfined, however, in considering the issues the Court will be guided by previous decisions as to the relevant factors to be considered and the purpose of the statutory restriction.  Those factors were recently summarised by Gilmour J in Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749 at [29].  Among those factors his Honour included “whether a cross-claim arises out of the same factual matrix as the claims made in the primary proceedings”.  This, in fact, is the nature of Baseline’s cross-claim. 

3                          The main proceeding concerns retention monies in the amount of $84,205.00 held by Baseline pursuant to a contract for the construction of formwork between the Arndell and Baseline.  Arndell claims it is entitled to return of those monies.  Baseline claims that pursuant to a deed of release between it and Arndell, it is entitled to retain the disputed amount.  At issue is the authority of the person who signed the document, Mr Marco Leon, to do so, especially as it was signed after the administration of the applicant company commenced when the consent of the administrators was required.  Baseline’s cross-claim joins Mr Leon as the second cross-respondent and alleges defective work by Arndell which caused loss to Baseline for which it now claims compensation. 

4                          As can be seen from the brief summary in the preceding paragraph, Baseline’s cross-claim goes to the heart of the dispute between the parties in that it arises out of the same factual situation that is behind Arndell’s claim.  The nexus between the competing claims is such that Baseline should be permitted to pursue its claim. 

Security for costs

5                          In its notice of motion, Baseline also sought security for costs in the sum of $70,000.  Section 56 of the Federal Court of Australia Act 1976 (Cth) empowers the court to order a party to provide security for costs.  It is accepted that, as a matter of law, the court’s discretion to order security for costs is unfettered however guidance as to the exercise of the discretion can be found in established principles and in the Federal Court Rules.  Order 28 r3 lists some factors that may be taken into account including that the applicant is suing for the benefit of some person other than itself and that the applicant would be unable to pay the costs of the respondent if ordered to do so.  The circumstances of Arndell seem to fall squarely within this description.  The company is suing for the benefit of its creditors and the liquidators admit that there are no funds in the liquidation with which to provide security.

6                          In an affidavit sworn on 14 May 2010, Mr Blair Pleash, one of the liquidators of Arndell says:

There are no funds in the Liquidation with which to provide security.  As to any creditors providing funding, a request has been made to the Australia Tax Office so far without any response and other creditors have indicated an unwillingness to do so.

If an order for substantial security is made by the Court and assuming there is no support from creditors, then the Applicant will not be able to satisfy it and this would mean that the case would not be able to be maintained.

7                          It is clear from this evidence that an order for security, at least in any substantial amount, would effectively stultify Arndell’s action.  While impecuniosity of a party is relevant to the question of security it is not definitive.  This is also the case where an order for security for costs would, as a practical matter, permanently stay the proceeding.  In the case of a company in liquidation it is also relevant to consider that the policy of the Corporations Act in providing for the orderly winding up of the company could be subverted if the liquidators’ attempts to realise the assets of the company for the benefit of its creditors were subverted by an order for security for costs; see Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679 and Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744. 

8                          In this case I am confident that the proceeding is brought bona fide.  Moreover, the case pleaded would seem to be difficult to resist in so far as it relies on s 437 of the Corporations Act and the fact that the deed of release was apparently signed after the commencement of the administration.  However, Baseline alleges in its defence that the amount to which it would be entitled in respect of the defective works would offset the whole of the retention monies claimed by Arndell.  In an interlocutory application such as the present, it is not possible for me to assess the merits of these competing claims.  Moreover, as Spender J commented in Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 at [13], an application for security for costs

… is not the occasion for detailed argument as to the sufficiency of evidence, what conclusions might result from a detailed consideration of the evidence, or even for a determination of whether, on analysis of the proposed evidence, the applicant’s case is unlikely to be successful.

9                          One issue that did concern me was the comparatively small sum claimed by Arndell in respect of retention monies held by Baseline ($84,205.00) compared with the costs of pursuing the present application.  On the evidence of Mr Pleash this sum would have little effect on the distribution to creditors.  Counsel for Baseline submitted that in the circumstances it would not be fair for his client to be subjected to the risk of not being able to recover on an order for costs if such an order were to be made in Baseline’s favour.  While I give some weight to this concern, ultimately I do not regard it as a sufficient reason to order Arndell to provide security for costs.

10                        In support of its submissions, Baseline referred to Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 in which the New South Wales Court of Appeal heard an appeal from an order for security made by the primary judge.  Their Honours considered the principles relevant to granting security for costs at some length.  Before considering the principles articulated in Green it is important to note significant differences between the circumstances of that case and the present.  First the application for security was not brought until two months before the commencement of a four week trial. Secondly, the proceedings were financed by a litigation funder and thirdly, the proceeding was brought by the liquidator personally rather than by the company in litigation.  These fundamental differences suggest that while the principles articulated by the Court of Appeal may be accepted, the ultimate decision is of little assistance here.  This can be seen from the concluding remarks of Hodgson JA.  In stating his conclusion at [60], his Honour, with whom Campbell JA agreed, said:

However, in my opinion, the very heavy costs of this case, together with the involvement of the litigation funder, combined with the primary judge’s finding that the liquidator himself would or may be unable to meet an adverse costs order (a finding not challenged on this appeal) are together sufficient to justify the order for security that the primary judge made, limited as it was to future costs.

11                        In exercising the discretion to make an order for provision of security for costs none of the factors mentioned above is determinative.  The task of the court is to weigh the interest of the applicant for security in being able to enforce any costs order made in its favour against the possible injustice to a party who is shut out of the proceedings by its inability to meet an order for security for costs; Idoport Pty Ltd v National Australia Bank Limited at [47].  Having weighed the factors raised in this matter I have concluded that the order for security sought by Baseline should be refused.  The costs of the notice of motion shall be costs in the cause.

Associate:

Dated:         2 June 2010